TTEC Holdings Inc (TTEC) 2006 Q4 法說會逐字稿

Welcome to the TeleTech fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Karen Breen. Thank you, ma'am, you may begin.

Thank you, Brian. Good afternoon, and thank you for joining us. My name is Karen Breen. I am Vice President of Investor Relations and Treasurer. TeleTech is hosting this call today to discuss results for fourth quarter and year ended December 31, 2006. Earlier today, TeleTech issued a press release announcing that its annual report on Form 10K had been filed with the SEC.

This call will reflect items discussed within that press release and Form 10K, and TeleTech management will make reference to them this afternoon. We encourage all listeners today to read our annual report on Form 10K. Speaking on today's call are Ken Tuchman, our Chairman and Chief Executive Officer, and John Troka , our Interim Chief Financial Officer. Before we begin, I would like to remind you of our disclosure regarding forward-looking statements. Matters discussed on today's conference call may include forward-looking statements relating to future plans and developments, financial goals, and operating performance, and are based on management's current beliefs and assumptions. Such statements are subject to risks and uncertainties.

Factors that could cause the company's actual results to differ materially from those described include, but are not limited to: reliance on a few major clients, the risks associated with lower profitability from or the loss of one or more significant client relationships, risks associated with achieving the company's 2007 and 2008 financial goals, execution risks associated with expanding capacity in a timely manner to meet demand, and the possibility of additional impairments and/or restructuring charges. Please refer to the financial tables in both the press release and Form 10K for the fourth quarter and year-end where we provide a reconciliation of nonGAAP financial measures. I'll now turn the call over to Ken Tuchman, our Chairman and CEO.

Thank you, Karen and good afternoon. I want to begin by reviewing our fourth -quarter results, after which I'll highlight our key accomplishments in 2006, and then discuss our goals for 2007 and 2008. I'm excited to report another quarter -- another quarter of record financial results. Our fourth quarter revenue was at an all time high of $337 million. Up 11% from the year-ago quarter.

This was the fifth consecutive quarter of double digit revenue growth resulting from high levels of new, renewed, and expanded client relationships. This strong performance further validates our industry leading position and ongoing ability to deliver strategic capabilities to our clients. Equally important are profitability continued to accelerate. As we reported, double digit top line growth, fourth quarter operating income increased 177%, to $28.9 million from $10.4 million in the year-ago quarter.

Additionally, we reported an 8.6% operating margin, exceeding our previously increased fourth quarter 2006 operating margin goal of 7% to 8%. This strong revenue and operating performance led to 114% increase in fourth quarter diluted earnings per share, which grew from $0.14 in the year-ago quarter to $0.30 in this quarter. Our financial performance during 2006 puts us in a solid position to achieve our year-end 2007 run rate goals of $1.5 billion in revenue and a 10% operating margin, which were first announced more than two years ago. Let me now review our major achievements of the past year.

2006 was the year of significant accomplishments for TeleTech. We reported double digit revenue growth in every quarter. We had approximately $250 million of net new or expanded business during 2006. And client retention in our core business was 93%, which was above our goal of 90%. Our 7% attrition rate in our core business was primarily related to our carefully designed strategy to migrate less profitable business out of our portfolio. In 2007, we planned to continue this effort to improve profitability.

Our revenue from clients served in offshore locations grew approximately 40% year over year to $400 million in 2006. Revenue from these offshore markets represented 33% of total revenues during 2006. And these markets had an annualized fourth quarter run rate of approximately $500 million. We believe this makes us one of the largest and most geographically diverse providers of offshore services in our industry. In 2007 we are already underway with expansion into two new international locations that will serve offshore clients.

Revenue in our targeted high growth verticals, retail, healthcare, and financial services grew from 12% of total revenue in 2004, to 21% in 2006, reaching $250 million. A revenue -- as revenue from these -- from clients in these high-growth verticals continues to increase, our overall client concentration has declined. In 2006, we had only one client that was more than 10% of our total revenue.

Our strong top line growth was complimented by improving profitability. Our 2006 operating margin more than doubled to 6% from 2.9% in 2005. Excluding stock option expenses of $6.9 million, our 2006 operating margin was 6.6%. We reached a milestone in our international BPO segment, with its return to profitability in the second half of 2006.

Revenue grew 13% in the fourth quarter to $92 million. Importantly, operating income improved by $13.1 million to $3.4 million in the fourth quarter from a $9.7 million operating loss in the year-ago period. The full year operating income was $1.6 million, a $23 million increase over the $22 million loss reported in 2005.

This significant improvement was driven by increased capacity utilization, the ongoing migration of in country business to offshore locations, the drive to increase our nonvoice or back office services, and continuing profit improvement initiatives. Our shared center capacity utilization improved materially, climbing from an average of 65% in 2005 to an average of 74% in 2006. Importantly, we finished 2006 at 80% utilization. This increased utilization was achieved while adding the most capacity in the company's history.

During 2006, we deployed approximately 7,000 new workstations in offshore locations where we continued to enjoy strong demand. This brings our total offshore capacity to 18,700 workstations or approximately 56% of our global delivery capabilities. Our investment in a centralized 100% IP-based delivery platform has significantly improved our global delivery quality and created a solid foundation for our emerging suite of new offerings, including OnDemand, our propriety Human Capital Services and our @Home Solution.

With approximately 47,000 dedicated employees and growing, we recognize the importance of quickly and economically attracting, screening, and hiring employees around the globe. To address this need we've invested significantly over the years in what we believe is the largest recruitment database of any public BPO provider. This is and will continue to be a competitive advantage as global labor markets tighten.

Another one of our proprietary training solutions is TeleTech University. This capability was first launched in 2005, and it has one of the largest CRM and BPO-based curriculums of any publicly traded company, offering 100 proprietary sources. During 2006, our 47,000 employees completed more than 600,000 online courses. Our clients have and are increasingly interested in licensing our proprietary human capital tools for their internal operations. We believe this will be an opportunity for future growth.

During the fourth quarter, we launched TeleTech @Home. After more than 1.5 years of internal technology and system development, we are very pleased with the speed to hire, the age in quality, the productivity, along with the staffing flexibility and the high security it provides to our clients during the quarter. Given strong client interests, we're launching our @Home Solution in select international locations and now expect that 5% of our global workforce will be working from @Home within the next 12 months.

Another key accomplishment in 2006, was our acquisition of Direct Alliance on June 30. We've completed the integration of Direct Alliance, and as expected, the acquisition has been slightly accretive to our financial results. We have several exciting new business opportunities underway with Direct Alliance and hope to share them with you soon.

We continued our share repurchase program and during 2006, purchased $17 million of our common stock. We continue to fund our growth and working capital requirements with a combination of strong cash flows from operations and our revolving credit facility. During the fourth quarter, we amended and extended our revolving credit facility for an additional five years, increasing the size to $180 million with improved pricing and covenant terms.

Our solid financial performance this year led to our highest return on invested capital in several years. We define ROIC as earnings before interest, taxes, divided by our average shareholder equity. Our ROIC at the end of the year was 21.4%, a significant improvement from the 10.2% at the end of 2005.

Having summarized our key accomplishments for 2006, let me briefly review some exciting market trends that continue to position us as a leader in our industry. We believe the global commerce landscape is in the midst of an evolutionary transformation. Specifically, we are seeing a fundamental change to a borderless economy whereby multinational corporations are aggressively seeking long-term strategic partners, with demonstrated capabilities to source their vital business needs on a global scale.

As a result, our clients BPO requirements are becoming more sophisticated, driving them to consolidate providers to those who can deliver a broad spectrum of superior BPO solutions. They're increasingly seeking partners who have a proven track record of operational excellence and are committed to investing in innovative new tools that can further integrate their front and back office needs.

Therefore, strategic capabilities and total value delivered are increasingly becoming the important differentiator in providers selections. These favorable market dynamics play into our expertise and our strengths and continue to position TeleTech as the premium global provider.

We believe very few companies can deliver the caliber of solutions we offer, due to our global reach, centralized and scalable delivery platform, standardized operating practices, and solid financial position. And our 25-year experience in the industry. Regardless of the requested services or geographic location of the work all our clients require is broadband connection to our network to leverage our global capabilities. It is this capability that supports our goal to serve Global 1000 clients located in G20 nations from anywhere, including the seven emerging markets we currently operate in.

In conclusion, our strong financial performance and commitment to increase profitability and ROIC gives us the confidence in our ability to achieve our near and long term financial goals. Let me now turn the call over to John Troka, after which I will make a few closing comments.

Thank you, Ken, and good afternoon.

As Ken just outlined, 2006 was a year of significant accomplishments for our company, resulting in record revenue and improved profitability. We are extremely proud of what our employees have accomplished for our clients and shareholders. Let me begin by providing an overview of our fourth quarter financial results.

As outlined in today's press release and in our Form 10K, we reported record fourth quarter revenue of $337 million. This was an 11% increase over the year-ago quarter.

Let me also remind you that the year-ago quarter included $32 million of revenue related to the short-term hurricane relief work we performed on behalf of the U.S. Government. Excluding this program, our fourth quarter revenue grew 23% year over year. Our earnings per share was $0.30, up 114% from $0.14 in the year-ago quarter. This quarter benefited from a one-time tax expense reduction of $3.3 million or $0.05 a share. This benefit related to our ability to now utilize certain tax laws carry forwards.

Also included in this quarter's results was $1.9 million of stock option expense or nearly $0.02 per share.

Our gross margin this quarter improved 540 basis points to 29% compared to the year-ago period. Several factors contributed to this improvement, including new and expanded business, driving increased utilization of our capacity, continued rapid growth in programs served from offshore locations, ongoing focus on improving profitability in certain client programs, and, finally, the successful execution of our multiphased cost improvement initiatives. Our fourth quarter quarter SG&A as a percentage of revenue was 16% up from 15% in the year ago quarter. The increase in the current year quarter is primarily due to stock option expense and higher funding for a performance based management incentive plans.

Our fourth quarter operating margin was 8.6% versus 3.4% in the year-ago quarter. As previously disclosed, our goal was to exit the fourth quarter of this year with an operating margin of 7% to 8%, and I'm pleased to report we exceeded this goal. Excluding stock option expense our fourth quarter operating margin was 9.1%.

Let me now highlight the performance of each of our core business segments. Starting with our North American BPO segment, revenue this quarter grew an immaterial PRF says 17% to $239 million, and represented 71% of the company's total revenue. The gross margin was 29.6%, up from 24.7% in the year-ago quarter. The operating margin was 12.4%, up from 10.5% in the year-ago quarter. This improvement was driven primarily by the items I previously mentioned.

Turning to our international BPO segment, we are pleased with the continuing improved performance we are seeing in this area. Revenue this quarter increased 13.5% to $92 million. This segment generated operating income of $3.4 million, a significant increase over the $9.7 million loss in the year-ago quarter.

This improvement stems from strategic actions we've taken over the past several years to improve our financial results in this area. These actions include: increasing profitability on a new and existing client programs, terminating unprofitable programs, and exiting underperforming international locations. Regarding Newgen, the business is performing as expected and we're in active negotiations regarding several near term business opportunities.

We expect to have additional information to share with you regarding Newgen during our first quarter conference call. Continuing now on with our overall results. Net interest expense was $600,000 this quarter, compared to $1.2 million in the year-ago period. This decrease is related to higher cash balances and lower borrowing costs as a result of our renegotiated credit facility.

Regarding income tax. Our effective tax rate for the quarter was 24.1%. As I previously mentioned, we benefited from a $3.3 million tax reduction from our ability to now utilize certain tax loss carry forwards. Excluding this benefit are effective tax rate for the quarter was 35.6%, and for the year it was 34.8%. While our quarterly affected tax rate will vary, we believe our 2007 normalized full year rate will be approximately 35%.

Turning now to our financial position: We ended the year with $60 million in cash and cash equivalents, and $65 million of borrowings under our credit facility. 2006, our net cash provided by operations increased by 128% to $95 million from $41 million in 2005. This cash, along with borrowing under our revolving credit facility funded our record capacity expansion our acquisition of Direct Alliance, and our share repurchase program.

Our accounts receivable at the end of the year were $237 million, up from $207 million a year ago. This increase was driven by our business growth and the acquisition of Direct Alliance. Our DSO's were 65 days in the fourth quarter compared to 67 days in the previous quarter. As our results show, during the fourth quarter we completed the largest sequential revenue ramp in our company's history.

Expansion to support this growth drove capital expenditures to $14 million in the fourth quarter, up from $11 million a year ago. Capital expenditures for the full year were $66 million, up from $38 million in 2005. Approximately 70% of our total capital spending was for growth-related needs, with the balance for maintaining our embedded infrastructure.

As we start the year, we believe our 2007 capital expenditures will be approximately $60 million. We also expect a split between our growth and maintenance capital spending to be similar to 2006.

Finally, with regards to liquidity, our EBITDA this quarter was $44 million, up 87% from $23 million in the year-ago period. Recash flow was $7.8 million for the quarter, up from negative $22 million in the year-ago period. Full year cash flow was $29 million, up from $4 million in 2005. The improvement in these liquidity measures is the result of our significant increase in operating income and from favorable working capital changes.

In conclusion, we are pleased with our solid financial performance in the fourth quarter and in 2006. Further, we are encouraged and excited about the positive market trends we see in our industry and our growing business opportunities. As such, we believe we are well positioned to deliver on our financial goals for 2007 and beyond. With that, I'll turn the call back over to Ken.

Thank you, John. We're pleased to have delivered five consecutive quarters of strong revenue growth. We believe the company is in a renewed growth and profitability phase.

As we begin 2007, let me share with you our key areas of focus, which include increasing revenue by approximately 15% and achieving our fourth quarter 2007 year-end revenue run rate of $1.5 billion, through expansion of new and exciting client relationships. We continue to target high growth verticals, such as healthcare, retail, financial services, to name a few.

Diversifying revenue into our sweet of new offerings including OnDemand and Human Capital Solutions. These capabilities have been deployed in scale across our 47,000 strong workforce and are being used by several clients with increased marketing underway to new and existing clients.

Number three, expanding our client base with the Global 1000, as they increasingly adopt and increase their BPO requirements.

Number four, increasing workstation utilization in off peak hours through our expanded back office capabilities.

Number five, pursuing select acquisitions that compliment and expand our current service offerings.

Strong execution in all these areas will enable us to achieve our financial goals. In 2008, our goal is to grow the revenue between 12% and 15% and improve operating margin by 200 basis points from 2007. Importantly, we have closely aligned our management incentive plans with achievement of these financial goals. I believe our leadership team is one of the strongest in our company's history, and we look forward to sharing our progress with you over the coming year.

With that, we'll open the call to your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Bob Evans. You may ask your question, and please state your company name.

Craig-Hallum Capital. Great quarter, everyone. Congratulations. Ken, can you comment more on the pipeline of business that you have now and where the confidence comes for the growth rates for both '07 and '08? How much of that is existing customers, how much of that is new business? But can you give us a little bit more color, in terms of what you have in your pipeline and your -- and why you have the confidence that you do in terms of the growth?

Well, I think first and foremost, we have been communicating to the street that 2006 was going to be the year that we really were going to start to put emphasis in sales and marketing. As we were going through -- as we completed the complete transformation and turn around of the business.

And with that, obviously, 100% complete, 2007, we have an undivided focus on building our pipeline and converting what's in the pipeline. And I think what's exciting for us is that right now we are seeing our pipeline build not only in North America, but we're seeing our pipeline build across the globe. There's no question about it that the conversations that we're having with CEO's around the world is no longer about should you outsource, it's simply a matter of, are we going to outsource with you, and do you have the right strategic capabilities that are going to differentiate us in the marketplace. So we have a very different mindset today than what we saw just a couple of years ago.

And that was recently validated when I was at the world economic forum meeting with several CEO's of the largest companies where there was an increased attitude towards in order for them to be competitive, they needed to dramatically add capability to their overall offering while simultaneously reducing their expense base. So we really feel very confident that our current pipeline is positive, is very good, it's where we want it to be. And we're also excited about the new pipeline, the new opportunities that are entering into our pipeline, not just in North America, but throughout Asia-Pacific, throughout Europe, and throughout Latin America. I hope that answers your question.

It does, but can you elaborate a little bit, in terms of the growth you've guided towards. How much of that is from existing, and how much of that is from new clients -- ballpark?

We think we're pretty conservative in our budgeting, and we are right now budgeting the 67% of our growth will come from our existing customer base.

Okay. 67%

And the remaining 33% will come from new logos. As I've said before, we have close to 150 of the world's largest companies doing business with us. That 150 companies spend well in excess of $50 billion in the outsourcing marketplace. We just scratched the surface of beginning to mine this customer base. And because virtually -- most of them are in long-term contracts, it's only logical that as they're under more and more pressure, that they're going to off load business to their preferred provider, and we're fortunate to be in that position.

So given that -- and I recognize this is a longer ways out, but, I mean, can you take any type of stab in terms of what would you look like in five years, given the backdrop of the environment? You're drawing at about a 15% rate now. I'm just trying to get a sense of what you think you might be able to become longer term.

Well, I mean I would hate to throw a number out there that I'm going to have to live with from five years from now. We thought it was pretty edgy that we threw a number out three years ago that we're now on track to complete and to meet or beat, which is the $1.5 billion number. I'd say that in the five to six year time frame, it's certainly not inconceivable for our company to achieve revenues in excess -- in the $2.5 billion range or beyond, and I would just leave it at that.

I don't think that I can give you really any more color than that, and that would most likely be based on primarily organic growth.

We think that the market opportunity is significant, and we think that we know that we have the largest offshoring business in the world, in the space right now. When you look at our revenues, compared to in the BPO space compared to some of the other well known companies like the Infosisis and WID pros, et cetera, and when you get down to what they do versus what we do, we have significantly more revenues, therefore, we're seeing a lot of momentum off of that revenue base.

No, I understand. And I give you absolutely credit for cracking to the goals you set a couple years ago. A couple detail temperatures. D&A, depreciation and amortization for this year, can you give us, John, perhaps a ballpark of what we should think about from a modeling standpoint?

For depreciation and amortization, again we expect to see something in the range of 4% going forward, consistent with what it has been historically. Obviously with the revenue growth that we're planning on delivering, continuing to look at the requirement for capital and the spending, and as I mentioned in my comments, looking to spend probably an incremental $60 million in 2007.

Okay. And final question. Europe was -- made big improvement in Q4, and it was nicely profitable. What should we -- not Europe, international in general. What should we expect out of international kind of going into '07?

There is no question you're going to see continued improvement in the markets that are currently being called international. We have a fair amount of business that's already slated to move from a higher cost country to a lower cost country which drives, obviously, our margin up. And so we feel very good about that across the globe right now, and that's going to continue to give us earnings expansion opportunities.

Okay. Thank you.

Thanks, Bob.

Our next question comes from Donna Jaegers, and please state your company name.

Hi. I'm with Janco Partners. Congratulations, Ken and the team there for a great performance. Two questions, you mentioned the labor arbitron market is starting -- the worldwide is starting to look at this. Can you give us some examples of what you're doing for maybe your European clients or your Asian clients to take them to lower-cost locations?

And then I have a second question on just the outlook for BPO sales and what sort of -- what the pipeline looks like, and are you -- I know you're looking to hire someone new to lead that effort. Are you close to hiring someone there?

Okay. So the first question, we are very focused on taking business that's in Spain, which right now there's close to $100 million U.S. in Spain and moving it to Latin America. We have successfully already done so with our largest client in Spain, and we are increasing the velocity at which we actually will be doing that.

In the U K, we are right now moving business to the Philippines, as well as to South Africa. And there will be other new markets that we'll be announcing shortly that will be open to the U K, as well as open to Spain that we're not prepared to talk about yet, just because we're in the midst of government negotiations, etc. We also are taking countries that have been traditionally in country only countries, meaning that the clients that were in those countries -- the business that was in those countries was generated from within that country, and we are converting those countries to near shore and offshore countries.

So, for example, Malaysia is now services Singapore and is now servicing the U.S. and will also be available to the UK. That's just one example of many examples. All of these are geared towards driving growth and driving margin expansion. You had another question --

On the BPO outlook, I know you guys are working hard on that, but any progress to report and any --

We're making tremendous progress in that area. I have to look at Karen because I don't know whether or not we've put out any announcements or not. We haven't. We've made tremendous progress in that area, and we're very excited about some recent hires that have come on, and you'll be reading about them shortly. But we are making strong headway in bringing in, not only a Chief Marketing Officer, but also bringing in leadership with very strong background in specific verticals that are right now high growth.

And so you will see throughout this year that there will be a considerable investment being invested in the sales and the marketing area so that we can insure that we see double digit growth over the next five years.

Great. Thanks, Ken.

Thank you.

Our next question comes from Brandon Dobell. You may ask your question and please state your company name.

Thanks. Credit Suisse. A couple of questions, Ken. Kind of leveraging off on the earlier questions about growth and margin trajectory. I guess the implication would be that either of the domestic outsourcing business grows a lot faster, and thus the higher margins drive the overall average up, or you see some pretty significant trajectory from the international side of profitability. I guess I'm just trying to gauge the order of magnitude, as you think about margins, where would most of the leverage come from? Is it going to be domestic? Is it going to be international, or should we think about both having the same impact on '07 margins?

As I was saying in my commentary, and it wasn't meant to sound gooblygop, but we really do believe that we're participating now in a true global economy, a true borderless economies. We're truly seeing opportunities come from not only in countries we operate in, but a significant amount of countries that we currently don't have any presence in whatsoever, not even sales presence. But it's where -- but it's in a G20-type country where there's a large Global 1000 multinational that's seeking us out to provide global services.

I want to stress that the majority of our large clients now we're servicing in five or more countries simultaneously, and that number, we believe in '07 and in '08 is going to start to grow rapidly where we're going to start wanting to be served in 20 or more countries. So we're currently servicing customers now in 45 countries, out of the current 17 countries that we have live operations in, there's two more operations coming on in second quarter, which will take us up to 19. But I think it's important to note that we're now servicing customers outside of countries that we have any form of presence.

So I'm not trying to not give you an answer to your question, but the reality is we believe that North America is showing strong growth potential, and we believe outside of North America, we're seeing strong potential. Primarily, though, in Europe and in an Asia-Pacific.

Okay. Fair enough. As you think about utilization, obviously a nice uptick on a year-over-year basis, if you look at utilization of some of these markets, at what point do you get nervous that the center is running a bit too close to the edge, meaning you start to worry about the service levels or the ability to handle any kind of -- a quick surge in volumes? And how far in advance do you look at the utilization rates and say, you know what, in six months we're going to meet capacity, or is it more of a three or nine month time frame?

That's a great question, and I'm really proud of our operation team, because they look at how hot, as we call it, our facilities are running on a daily basis. And to your point, if you run any one facility too hot, you tend to push attrition up, you tend to push quality down, etc. So that's a huge focus of ours that's being monitored every single day of the week.

The reality is that because we are so large, as it relates to the number of workstations, I believe our total workstation counts is now up to 34,000. In fact, we can actually push the 80% up to as high as 95 or 98% before we're in any danger of causing any issues because of the amount of [indiscernible] on the law of large numbers.

So if you've got 34,000 workstations, obviously we're going to be building more in 2007 that will probably get us close to maybe 40,000 workstations. If you take 10% off of that, which would put you at 90%, that would mean that at any given time you'd have 4,000 available workstations.

This is one of the many reasons why we think we will be winning the larger contract opportunities that are out there because of our size and our scale and the ability to scale up. The other point that I'd like to make is we are rapidly deploying our @Home, and without getting into lengthy @Home discussion, that will give us additional head room so that, as in certain markets if we start to get too close to a high occupancy number, we can obviously deploy in a moment's notice @Home capabilities in the countries that make most sense.

Obviously, we won't be deploying @Home in the Philippines, and we won't be deploying @Home in India, but we will be deploying them in several other countries that we operate in.

So I think to answer your question, we're targeting right now an overall capacity utilization of about 85% through this year is where we'd like to get to. The reality is that we think there will be periods of time when it might -- when it has the potential to jump ahead. But we think over the long term, 85% is probably the number that we're going to have to manage to and maintain to.

The last point I want to make, Brandon, is remember that capacity utilization is very important to us, but workstation utilization is the Holy Grail. And so for us it's all about adding hours of operation to our existing assets. And that's how we're going to drive our ROIC from what's now at 22%, how we'll drive it to 30% and potentially beyond. And the way we'll do that is by extending the hours that we're currently operating across the globe. And so that is where the real focus is, and that focus will stay on for at least the next three to four years, as we add more nonvoice based back office processing, like mortgage processing, warranty processing, pension plan administration, loan administration, etc., which we're now increasingly doing more and more and more of that work. As a matter of fact, we believe we're doing more of that work than any company in the world today.

Brandon, this is John Troka. The only thing I would add to Ken's comments, relative to the real estate group we have that's out scouring the earth, if you will, looking for appropriate locations for us to offer our services. They do an effective job of getting out and working with local government agencies and others to try to find environment and to get incentives and things put in place that will benefit us. Obviously key to us -- when you talk about centers and getting concerned about them, the key to us is the labor force that is available to us and the competition for that labor in the marketplace. And we believe that, again, we are world class in understanding and analyzing any particular market and what's out there, and what that would mean.

We sized the centers that we put these locations accordingly. So for us the key is making sure that we have in place the appropriate conditions to allow us to attract and maintain the workforce, because that's really the key. The fact that we're running 1,000 seat center 20 hours a day isn't necessarily bad, as long as we are confident that we're not burning through the employee base that's in any particular location.

And we have been very successful over the past several quarters in working with local government and getting protections for TeleTech relative to exclusivity in certain markets and the like, which allow us to have fettered and unfettered access to the workforce that's there.

That's very helpful. One final question as I was going through the 10K, I noticed commentary around the Direct Alliance acquisition not meeting your or their '06 targets, and then some noise around a contract renewal.

Maybe if you could give us some color on what the issues were relative to them not meeting the targets and if there's a time frame under which we should have some visibility into that renewal or the payment back to you guys for not making that renewal.

The two items that you're talking about were things that were put in the purchase agreement. Obviously, as we looked at the business and did our evaluations, we thought that the company was worth a certain amount. It was contingent upon a couple of things relative to the contract renewals. We are in active negotiations with the client that the claw-back provisions are linked to, and, in fact, there's two separate clients that are involved in that situation.

One of the contracts has already been signed. It's another client that we believe we are within weeks of finalizing that contract.

And so, again, for us, that was a protection that we wanted to make sure that those key clients were renewed, and we are very confident that we will not have an issue in getting renewed at a rate, which was part of the agreement -- at a rate structure and a profitability level that was consistent with what we had included when we looked to buy the business.

On the bonus, the bonus was basically set to say, if the business performed well in excess of where it was at, that insight had an opportunity to earn some money on that. They obviously were giving up an asset, and they just wanted an ability to participate. We felt that was fair at the time. The bonus was linked to specific metrics.

Unfortunately, they did not -- the business did not meet the baseline metric for a payout under that plan. Nonetheless, our acquisition model didn't assume that we would be paying anything for that. So when we did our modeling, in terms of the final purchase, it didn't assume that we would be having a bonus payment necessarily back to insight. It was put there in case the business exceeded expectation.

Great. Thanks a lot. Very helpful.

Thanks, Brandon.

Our next question comes from Tobey Sommer. You may ask your question and please state your company name.

Thank you. SunTrust Robinson Humphrey. I have a question. Industry trends in your own company specific trends are very good right now, and I'm just trying to step back and think of what could kind of be a bogey man and derail things.

Anything that you could comment on about what keeps you on up -- keeps you up at night, if it's looking at Capex trends among competitors or anything like that that could cause you to think that they could impact your growth rate or somehow your performance? Thank you.

I really think the only thing that ever -- that keeps me up at night as it relates to TeleTech is something that I would hope keeps every CEO up at night, regardless of what industry they're in, and that is just the timing of their pipeline and that the pipeline converts at the speed at which one projects in their forecasted budget. And the reason for that is because it's not always within our control. And it's not uncommon for us to have a situation where we've been awarded business and the client delays the actual start date.

That said, we're getting to a size now that that's having a far less impact going forward, because any one new client or any one new project that we're launching on an overall percentage basis is relatively small, and, therefore, if it gets delayed, it's all built into our budgets, so that we can try to maintain some solid earnings visibility, as well as consistency.

I would say that's really it right now. You've caught us at a time where management is feeling very good about their accomplishments, but that said, we know that we still have more to do, and we -- all of us believe that there's always a lot more that we're capable of doing. So when we get -- when we start printing the 10% number, we'll move on to the 12% number. When we print the 12% number, we'll move on to the next number. And that's part of what makes it fun and challenging, and also part of what keeps us up at night.

Thank you. Another question. The new segments that you've seen expanded revenue growth from, retail, heathcare, and financial services. Do you have an expectation for what percentage of revenue those could represent in a couple of years?

Well, I think if you group healthcare into it, it could certainly be -- it could go from a 21%, it could go to 40-plus%. We are rapidly expanding in these areas. We are inventing a lot of technologies in these areas that we're not prepared to talk about on this conference call, but will be prepared to talk about very shortly that we have been applying for numerous patents on, etc. And so we think that there's tremendous potential in these areas as it relates to us helping these very large corporations manage their back office, as well as their customer facing experience.

And then two other questions, and I'll get back in the cue. One, if you could comment on the collective bargaining that's ongoing in Spain that I think I saw in the 10K, and then also if you could comment on, from an infrastructure standpoint, you've got a very robust one, and I want to see if you could comment on the earthquake off of Taiwan, and how that may or may not have impacted or benefited you, and how you feel about your infrastructure from that perspective. Thank you.

Tobey, it's John Troka. Relative to the bargaining agreement in Spain, relative to the bargaining agreement in Spain, the agreement just so you're clear is not an agreement specifically with TeleTech and a union. It's actually an industry agreement and all providers have to abide by the agreement once it's struck. It comes up every three years, and every three years the industry has successfully negotiated it. Obviously key is wage increases and benefit type issues. But, again, it's something that we deal with every three years. At this point we don't see anything that would indicate that we will not reach resolution on that.

I would tell you the industry continues to operate on a day-to-day basis. So it really just gets down to final settlements, and then us going back as one of the companies within the industry, making sure that we pay our people appropriately under the terms of the new agreement. And we actually, as we put forth our plan, we plan for these things, and we make an estimate of what the increases are expected to be, and appropriately reserve for it until the final determinations are made.

Tobey, regarding the tsunami, for those of you who don't know, there was an earthquake off of Taiwan approximately 45 days ago, that took out approximately 65% of the under sea fiberoptic capacity serving Asia-Pacific.

We're very proud of the fact that because of the way we've designed our gigapops, the fact that all of our capacity is virtual, the fact that our gigapop posting centers are located in six locations around the world, and that we have redundant networks that go all the way around the world, not just one side serving the location. That when this really catastrophic event took place, we had virtually no interruption. There was one period of time in the Philippines where we experienced 48 minutes of interruption, and that was unfortunately unavoidable, and it was just due to the carriers that were moving all the capacity over, etc., because this had such a huge global impact.

That said, our overall volumes actually increased because a high percentage of our competitors were down, either hard down all the way or 60-plus% of their capacity was down for several days, some as long as a 1.5 weeks. So we did extremely well through this situation. The good news is the 48 minutes were in the middle of the night in the U.S., which is when that capacity is delivered. And so it was an uneventful event.

That said, we had all hands-on deck, and immediately added more capacity because naturally we were then only running on a nonredundant network because part of the network was taken out, immediately added more capacity so that there was no further risk.

So we think it was a great demonstration of our virtualized capabilities and that we designed our network in a robust way. Our clients certainly took note of it, and I think it's actually helped us out futuristically on some future opportunities.

Thank you very much.

Thank you.

Our next question comes from Matt McCormack. Please state your company name and ask your question.

Yes. Hi. FBR. In terms of your guidance, in terms of the revenue for '07, does that imply any more in acquisitions, and then what is implied in '08 for the revenue guidance?

No, it assumes no acquisitions.

For either?

Correct.

Okay. So in terms of the guidance --

Obviously, it doesn't preclude us from doing acquisitions, but it's not what is included in our budget numbers.

Right. Right. Got you. Your also guidance for some nice margin expansion into '08, you said 200 basis points. What do you think the long term or the optimal margin profile of this business is? Is it 15% or higher, lower? Where do you think the margins could go eventually?

We in the K discussed some of the history of the company, some of the growth-related history, the margin related history, etc. And we think that if our business is properly blended with voice and nonvoice capabilities, along with a lot of the new IP that we're bringing to the market, we think that it's definitely a -- it will be achievable -- we will have the ability to achieve the historically high margins that we achieved in the past, which would, let's just say, be in the 14% to 15% range. We're comfortable with that, and we're comfortable that our portfolio is balancing and diversifying in a way that we see those types of numbers.

Okay. And in terms of the portfolio, you did mentioned OnDemand, and I guess your Human Capital, your educational offering. Can you tell us what percentage of revenue that is right now and where that -- where that is going to go to in '07 and '08 implied in your guidance?

Yes, I think right now the percentage of OnDemand and Human Capital is very small and not significant enough for us to be talking about it or bragging about it. That being said, we're very excited about the deals that we are just now bringing on board, etc., and we do believe that it is -- that it will, in fact, have the ability to be material to our overall business in the coming years.

Okay. Great. Thank you so much.

Thank you.

Our next question comes from Jeff Nevins please state your company name

Good afternoon. A couple quick questions here. On the outlook, Ken, I assume that this is -- includes the current state of the Newgen operations? Meaning the '07 outlook?

This is John. Jeff, that's correct. Obviously, the performance that we delivered in the fourth quarter in last year reflected Newgen, and the guidance we've given '07 and '08 reflects our expected performance from Newgen, and it's continuing as an asset of TeleTech.

And the international segment from a profitability perspective, it bounces around a little bit, but it doesn't seem like you're on a track that's going to kind of stay flat or go up. Is that fair in 2007?

No. It's going to go up. It's definitely going to go up.

Right. Right. I said flat or go up and -- okay.

So it would be on the go up versus the flat.

Got it. And then the DAC revenue, I know for the year was $34 million. If you could pull it out there, could you tell me what it was for the fourth quarter?

I don't think we're recording it that way, otherwise we would share it with you, but what I would say is it is about even with where it was, and we're very confident in the pipeline on Direct Alliance on a go forward basis. There are several existing TeleTech clients that have either already expressed interest and want to start or have actually already started and are now clients of Direct Alliance. So we feel very confident that we'll be growing that business as to the plans that we've set forth before, which is we're comfortable that we can grow the business 25% a year.

Final question, small housekeeping questions. But you had two charges in the quarter, one was was in restructuring, one impairment. Which operating segments did those fall into? If you don't have it now --

They fell both into the North America and international segments. The impairment was North America, and the restructuring was in the international.

Okay. Thanks a lot, guys.

Our next question comes from Cynthia Houlton. Please state your company name and ask your question.

RBC Capital Markets. I know there have been a lot of questions already about margin. I guess this is something -- just to further focus on. In 2006, obviously, there is a huge year-over-year increase in the operating margin in North America, international certainly starting to improve as we exited '06.

If we think of the outlook, and, obviously, you're still anticipate pretty good market expansion in '07, should we assume that the bulk of the overall company margin expansion is going to continue to come more from North America, or is international going to have a more material role -- I'm just trying to get a sense of -- can North America get to the high-to-mid teens on its own? Is that kind of where North America will stabilize and the rest of the margin expansion in the business will come from international? If you could help kind of set some targets whether it's '07 or '08, or whatever you feel comfortable with.

Cynthia, it's John. Relative to the margin expansion, one thing that I want to remind you of is our North America segment does include our operations in the Philippines and India, which, as you know, is growing tremendously for us.

And so -- that we expect to continue to grow, and as it does, we expect to continue to see solid growth in our North America segment. The North American segment also picks up portions of the profits for business that we put in other of our offshore labor delivery locations, such as Argentina, Malaysia, and the like. So, again, as we take U.S. and North American based clients and serve them across the globe, we are getting that margin lift in both the North America segment and in the international segment. With that said, large countries like Australia and Spain that are big elements of our international segment are doing similar type things, in the sense we're looking to move them to emerging markets. However, the profits in that case would actually stay in the international segments.

Unfortunately, that's a bit confusing, but bottom line is that we believe that the margin expansion that we are forecasting and projecting is going to be occurring in both of the segments.

Okay. Maybe a better way to ask this -- and sorry if my question wasn't clear -- is that if we look at kind of a best case scenario of what this business can run at when you're not shifting business around, and you're kind of at a more steady state, is that kind of a mid teens margin, is that higher than that? If you think of outsourcing and services models, once you get past 15%, closer to 20%, that tends to be where margins max out. If I think of the services that you're providing, sometimes we've seen companies on the lower end of that, not necessarily closer to 20%. And, obviously, you're rolling in things like @Home.

So I'm just trying to get an idea of how those pieces can roll into the margin and what kind of a target margin can be.

Yes. I think the only way to answer your question is to say that longer term several multiple years out there, we think it's possible to achieve in the 14% to 15% net operating margin range. So today our target is to be at 10% at the end of this year, and we will balance the portfolio, which we think is what this business is all about. It's not about putting all of your eggs in India, it's not about putting all your eggs in the Philippines. It's not about putting them all in Latin America, etc. Our goal is to be firing on all five continents, with a diversified platform, with extreme rigger and discipline on our pricing, and that is what is going to allow us to deliver that, in combination having with IP that is proprietary, that's patentable, that's defendable, that we can provide to our clients, and that we can charge for, versus just solely providing the back office functions.

And then just a quick follow up, along the same lines. If we think of both the @Home agent program and then your focus on adding nonvoice services, how much of -- are either of those initiatives important to the margin expansion in '07 versus '08? Meaning, are you factoring those two pieces being material this year, or is that something that's more of an '08 factor?

The nonvoice initiatives are very important, and we believe that we have already signed enough business from last year, as well as this year, that we will -- that we're comfortable with the 10% number that we've put out there for fourth quarter of this year. So, yes, it is important, and the reason why I've said it's important is because for every hour of work that we can add to the current 10.2 hours that we're operating, it's worth close to 150 basis points. So there is an extreme focus in this area, and there is a lot of domain expertise that we believe we have in the areas of mortgage processing, loans processing, healthcare claims processing, etc., that is going to allow us to deepen our relationships with our existing customers, as we demonstrate to them that there is more cost take out that can be realized by integrating the front to back office.

Great. Thank you.

Thank you. Our next question comes from Josh Vogel, please state your company name and ask your question.

Hi, Sidoti. Do you have an idea of your total plan, the workstation build out for '07, and if you could break them out to offshore versus North America. Hello.

I'm sorry. We're right now looking in our three-ring binder. The answer to that right now is that we have current plans for around 5,000 additional workstations in four emerging markets. So all of the new capacity will be in an offshore environment, and we look forward to updating you on those numbers as the year unfolds.

Okay. And how many seats are you planning for Q1?

Oh, boy. You know what? We're going to have to give that to you off line just because we don't have it at our fingertips right now.

Okay. No problem. Of your roughly 19,000 offshore seats, how many are in the Philippines?

The question was -- did you say just the Philippines?

Yes.

Right now we're at about 8,000 workstations in the Philippines, 11,000 employees, and that number is still growing. But there's more emphasis being put in countries other than the Philippines, like I say, so that we have a balanced portfolio.

Okay. But when you discuss targeting some back office opportunities, would that be mostly out of the Filipino capacity?

Not at all. It's all over the world. That's the beauty of it is that our clients are letting us route it wherever we have the available capacity, and as long as we can deliver on the quality, they're not focused on the country.

Okay. Shifting focus a little bit. I haven't had time to fully look through the K yet, but is -- did you mention anything about where you expect Newgen's losses to be in Q1 for '07?

Yes, this is John. The loss in the first quarter is expected to be similar to what it is in the fourth quarter.

Okay. And, John, just finally, what tax rate should we be looking for in '07?

It will be about 35%.

Okay. Great. Thank you.

Thank you.

Our next question comes from Dave Koning. Please state your company name and ask your question.

Dave Koning at Baird. I'm wondering from the 10K, we had a chance to go through the gross margins across the business lines. It looked like the international gross margin was 29% in Q4. In the highest it's been in the last several years was 23%. And I'm just wondering if anything happened specifically there to cause such dramatic margin improvement sequentially?

Yes, at this point, the margin improvement is primarily operational. Again, as Ken has indicated earlier, we are seeing or beginning to see where some of our clients in the international segment are taking their work to some of our emerging market, offshore locations. When they do that, that improves our profit abilities. So --

And then the only other point I'd add is that we're getting pricing strength in that we look at every single contract on an ongoing basis, and if we believe that it's not optimally priced and we raise the price, and there has been a fair amount of that that went on in 2006, and we're now starting to realize the benefit of those newer prices.

Yes, and our capacity utilization in those locations is also going up. Again, if you go back in time a little bit, you will recall we've shut down some of our foreign locations. We shut down some of our sites. So, again, as that capacity utilization in those locations goes up as well, we begin to see some efficiency and leverage there.

Remember we shut down Korea and also our Glasgow operations. So that all helps.

Okay. That's great. And then just one follow up. Within Newgen, how much corporate overhead, in terms of dollars in a year, how much corporate overhead about does that unit bear?

Yes, this is John.

Is that something we break out normally?

No.

We can calculate it.

Okay. It's roughly 3%.

Okay. Great. Thank you.

Thank you.

Okay. Our last question comes from Donna Jaegers. Please state your company name and ask your question.

Janco partners. Most of my questions have been answered, but I just wanted to double-check. Ken, when you said that you could add customer service work from the U.K. to the Philippines, that would be a different day part. Right? So can you use the same centers that you're using right now for U.S. customer care for U.K. customer care on a different day part?

Bingo. That's exactly what we're focused on doing. We're following the Sun strategy. It's been a dream of ours that we've had over the last almost 10 years. We're doing the same thing in Australia and the same thing in New Zealand, and that's why we're driving our capacity utilization up. So that is exactly what's happening, and that's why we're increasing our sales efforts in Europe and increasing our sales efforts in Asia-Pacific so that we can take advantage of all the various different time zones.

Naturally, our cost of labor is actually lower during the daytime in these markets. So we get actually two benefits: One benefit being that we're infilling capacity, extending the hours, etc., and getting better asset utilization, and the second benefit is that we're not having to pay a premium preferential shift salary because people are having to work through the middle of the night.

Great.

In places like the U.K. or in Asia, they get closer to more normalized hours.

All right. Thank you.

Thank you very much.

This concludes the TeleTech earnings conference call. You may disconnect.